Accepting the Reality of Secular Stagnation

New approaches are needed to deal with sluggish growth, low interest rates, and an absence of inflation

 
A fundamental difference between natural science theories and social science theories is that natural science theories, if valid, hold for all times and places. In contrast, the relevance of economic theories depends on context. Malthus’s theory of food availability was valid for the millennia before he formulated it, but not after the industrial revolution. Keynes’s ideas were much more valid during the Great Depression than during the inflationary 1970s.

I am increasingly convinced that current macroeconomic theories, with their premise that monetary policy can determine the rate of inflation, may be unsuited to current economic reality and so provide misguided policy prescriptions. They failed to anticipate Japan’s deflationary slowdown that began in 1990, or the global financial crisis, slow recovery, and below-target inflation during a decade of recovery, or the sustainability of high levels of government debt with very low real interest rates.

Understanding these developments and crafting policies that respond effectively will likely require that economists develop what might be called a “new old Keynesian economics” based on Alvin Hansen’s Depression-era idea of secular stagnation. This article summarizes the case for new approaches to macroeconomics by highlighting important structural changes in the economy of the industrial world, explains the secular stagnation view, and draws some policy implications.

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Πηγή: imf.org